Wharton Property Advisors, Inc.

In these turbulent markets tenants should be considering every possible way to conserve rent expenses, which is a major proportion of their total business expense. Here’s where we can help.

Recently, we have detected a significant increase in available sublets, which are priced considerably below the rental rates for direct space. We expect more space to be coming on line as financial firms consolidate and look to dispose of space.

We have considerable experience in finding and structuring sublet arrangements. Accordingly, if you are thinking about making a move or want to jump start a new venture, you should give strong consideration to sublets. They are usually better economic deals than direct space, both in dollars saved in rent and in capital required for renovations. A sublandlord usually wants to minimize its financial obligation and is not concerned with a mortgage or the market perception of a reduced rent. As a result, sublandlords frequently offer space at a lower rent than they are paying the overlandlord.

Additionally, with many sublets furniture and phones are left in place. There is little value to used furniture, usually a mere 10% of the original price, and moving furniture actually costs more than its value. Many sublets are recently constructed space, requiring minimal work. As an added bonus, sublets often contain above-standard, even lavish, installations.

• What is the catch? What are the risks?    As with many situations, the risks can be managed; with a well constructed deal, the subtenant can be protected.
• First, the credit risk.   Sublandlords are often in a weak financial position. They want to sublet their space because they are downsizing. In the event of the bankruptcy of a sublandlord, a subtenant could lose his security deposit, and even, possibly, his lease position if the space is recaptured. To protect the sublease position, the tenant can ask the sublandlord to post a reverse security deposit, and/or request the landlord to write a non-disturbance clause in which the landlord agrees to allow the subtenant to remain in the space at the actual rent of the sublessor. Another alternative is to enter into an agreement with the landlord providing that the subtenant may “attorn” to the landlord by paying rent at the sublessor’s rate if the sublessor goes out of business.
• Timing:   the documentation on sublets can take longer to complete due to the need to obtain the landlord’s consent. Usually landlords have 30 days to review the lease and give their consent. While some landlords act very quickly, others are not as helpful. On the positive side, the sublease document itself is far simpler than a direct lease.
• Subtenants’ lease position:   during the negotiation stage, it is very important for the subtenant to determine if he will be able to work with both the sublandlord and the landlord. If problems arise with the building, a subtenant has no legal rights to approach the landlord for assistance. The subtenant must work through the sublandlord who then approaches the landlord for assistance. Relationships formed during the documentation stage are key.

In well selected situations, the subtenant is in a strong position because neither the sublandlord nor the landlord wants the space to remain vacant. A potential tenant can use this leverage to negotiate positive terms and win great space for below market rents. Subleasing is an important option every tenant should consider. You can’t afford not to!